Be socially responsible or perish!

Ntim, Collins (2019) Be socially responsible or perish!

Record type: Other

Abstract

Be socially responsible or perish!
Why 21st century business leaders need to be both economically and socially responsible?

The American Economist, Milton Friedman famously argued in the 1960s and 1970s (see his book – capitalism and freedom, published by the University of Chicago Press in 1962 and his 1970 New York Times Magazine article, vol. 13, pp.32-33) that:

“…the social responsibility of business is to increase its profit”

Specifically, Friedman argued that the main objective of business leaders, such as finance directors and CEOs should be to make as much money as possible for their owners, whilst operating within the law. Friedman made a number of arguments in support of his view. For example, he argued that by maximising profit, a firm will invariably be contributing to, and performing, its social responsibilities, if indeed it had any at all, in many ways, including creating jobs, providing essential goods and services, and paying more taxes. Similarly, Friedman argued that even if the corporation has social responsibilities, managers were ill-placed to identify the most urgent needs of society and therefore, any investments by business leaders may be misplaced. Managers may, for example, be biased in their choices – they may invest in issues that they are personally interested in or benefit from rather than those that society actually needs. Additionally and by contrast, government collects taxes, and therefore, it is not only the primary responsibility of the government to identify and meet the social needs of society, but they are also better placed to do so effectively and efficiently through political campaigns and elections. Consequently, Friedman argued that a business has no social responsibilities beyond complying with the law, such as faithfully paying its fair share of taxes.

Nevertheless, I note that Friedman’s view was largely a reflection of the now increasingly discredited Anglo-American shareholder model (common in the UK, US and the commonwealth) of the corporation in the 1960s that is underpinned by the concept of ‘shareholder primacy’. The concept of ‘shareholder primacy’ implies that the corporation exists first and foremost to serve the needs of its shareholders, and that the interests of any other stakeholders, if any, such as bankers/financiers, customers, employees, environment and society, and governments are secondary. Indeed and in contrast to the ‘shareholder model’, the stakeholder model (Continental European model, common in Germany and Japan) suggests that the corporation must be run to maximise the benefits of all stakeholders (such as employees, environment and government) of the firm of which shareholders are only one of them.

In this article, I explain why the shareholder model in general, and Friedman’s view regarding corporate social responsibility (CSR) in particular, is wrong, and therefore needs to be rejected in favour of the more feasible Continental European stakeholder model by 21st century business leaders. First, Friedman’s view of government does not always hold, especially in developing countries. Specifically, due to the often relatively limited resources, governments cannot simply do everything, and that there will be something for businesses to contribute to for society, especially in developing countries, such as education, housing, healthcare, water and environmental pollution. Second and more importantly, although governments collect taxes, in the context of weak and ineffective government, reminiscent of governments in developing countries, such taxes are not often used for the purposes for which they have been collected. The World Bank and other economic bodies, for example, report regularly that large amounts of taxes are siphoned by corrupt public officials and dictatorial regimes, especially in developing countries. Third, in some cases (developing countries), business leaders often connive with corrupt politicians and public officials by paying smaller bribes in lieu of paying larger taxes to the government, whilst in others (developed countries), business leaders usually employ complex and doggy tax schemes to avoid paying taxes with numerous available examples. Further, in failed states, such as war torn countries, there are often simply no governments to provide the needs of society. Thus, due to these apparent market failures and imperfections, in practice, responsible businesses will have a role to play in fulfilling some form of social responsibility.